Largest AIM companies stick with UK Corporate Governance Code
AIM companies are required to adopt a recognised corporate governance code – which one do they choose? One of the main attractions of listing on the AIM market is the reduced regulatory requirements compared to a main market listing, but do the biggest AIM companies take advantage of this, or do they stick with the UK Corporate Governance Code?
This summer we saw a number of significant changes in light of the UK Government’s wider corporate governance agenda. Alongside the introduction of a new UK Corporate Governance Code and an updated QCA Corporate Governance Code, the amendment to AIM Rule 26 requires all AIM companies to select a corporate governance code.
Under this rule, as of 28 September 2018, every AIM quoted company must state on its website which recognised corporate governance code it has decided to apply and to explain how it complies with that code. They also need to provide an explanation of any departures from that code.
Many AIM quoted companies previously stated that they complied with the UK Corporate Governance Code or QCA Code “so far as appropriate for a company of this size” or something similar, i.e. that they do not comply in full (a qualified compliance statement). Such terminology is no longer acceptable and substantive disclosure is expected.
MM&K has investigated the corporate governance statements of the 20 largest AIM quoted companies (by market capitalisation).
11 of these companies have adopted the UK Corporate Governance Code, eight have chosen to comply with the QCA Code and one, Burford Capital, reports against the Guernsey Finance Sector Code of Corporate Governance. Research by the QCA itself into the practice of all AIM listed companies (over 900 companies) shows that 89% have adopted the QCA Code rather than the UK Corporate Governance Code. It is clear that the dominance of the UK Corporate Governance Code among the top AIM quoted companies is a feature of company size.
In terms of level of detail, the corporate governance statements are generally similar. Companies following the UK Corporate Governance Code give a broad explanation of how they comply with its five main principles under the following headings:
5. Relations with shareholders
Those following the QCA Code provide a broad explanation of how they comply with its 10 principles, which are:
1. Establish a strategy and business model which promote long-term value for shareholders;
2. Seek to understand and meet shareholders’ needs and expectations
3. Take into account wider stakeholder and social responsibilities and their implications for long-term success
4. Embed effective risk management, considering both opportunities and threats, throughout the organisation
5. Maintain the board as a well-functioning, balanced team led by the chairman
6. Ensure that, between them, the directors have the necessary up-to-date experience, skills and capabilities
7. Evaluate board performance based on clear and relevant objectives, seeking continuous improvement
8. Promote a corporate culture that is based on ethical values and behaviours
9. Maintain governance structures and processes that are fit for purpose and support good decision-making by the board
10. Communicate how the company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders
The majority of companies make references in their website statement to their Annual Report, for example by providing a link to the Remuneration Report for further details on the committee’s activities. Several also point the reader towards the corporate governance statement in their Annual Report.
At the beginning of their statement, some companies clarify whether they believe they have complied fully with the code. For example, Fevertree Drinks plc’s statement includes “Given our stage of development there are certain provisions of the Code which we do not feel are appropriate for the Group at this point in time and therefore do not fully comply, further details on which are set out below”. However, only five companies include a statement similar to Fevertree’s, with a further four proclaiming they have not departed from the code in any way. For example, Secure Income REIT plc state “As of 6 September 2018 the Board does not consider there to be any areas relevant to the Company where it does not comply with The Code”. The remaining 11 companies are less explicit on departures from their chosen code.
The five companies referred to above are clear in explaining how and why they have not complied; a common departure was from provision B.1.2 of the UK Corporate Governance Code, which states that, except for smaller companies, at least half the board, excluding the chairman, should comprise non-executive directors determined by the board to be independent. The reason typically given is that despite non-compliance, the board has an appropriate balance of skills, knowledge and experience to enable it to discharge its duties and responsibilities effectively.
Another trend is the inclusion of an introduction outlining the company’s beliefs and philosophy surrounding corporate governance. ASOS plc, for example, included the following one by the Chairman:
“For ASOS Plc, ‘Doing the Right Thing’ is pivotal to every part of the business model and good corporate governance is a key part of this. As an AIM listed company with a significant market capitalisation, we recognise the need for ensuring that an effective governance framework is in place to give our external investor community and our employees and suppliers, the confidence that the business is effectively run”.
Seven companies divulge their corporate governance philosophy (in six cases it is in the form of a chairman’s introduction).
Hurricane Energy plc provides an interesting example of switching from the QCA to the UK Corporate Governance Code. In 2017, the Board decided to change due to the company’s size (Hurricane’s market capitalisation rose from under £65m at the start of 2016 to a peak of over £800m in 2017). Still, company size is not the only factor in deciding which code to follow, both Boohoo Group plc and RWS Holdings plc follow the QCA Code and have larger market capitalisations than Hurricane (£1.3bn and £2.4bn respectively).
The requirement of AIM Rule 26 is very recent. The test of any code and disclosure under it is whether it provides shareholders with the information they need to exercise their stewardship or make decisions on their own behalf in the case of beneficial shareholders. We would expect shareholders to assess over the coming year whether companies are providing this information and to influence companies to change code if necessary. It will be interesting to see if the higher “outcome focus” rather than procedural focus in the QCA Code will lead some shareholders to prefer the AIM companies they invest in to use the QCA Code.